Posted on Mar 19, 2018
Samantha, age 27, is a special education teacher in her third year of teaching. She and her fiancé have just bought their first home and are planning their wedding for next year. With student loans, a new mortgage and marriage on the horizon, retirement seems a long way off for the young couple. Yet, Samantha started socking away 10% of her income in a 403(b) plan set up by her employer in her first year of teaching, as soon as she was hired. Her fiancé, who works in construction, also contributes 10% to his employer’s 401(k) plan and gets a match of 6%.
“It’s an automatic deduction from my paycheck, so I never see it,” she says. “And truthfully, I didn’t understand anything about the plan until we attended an employee seminar and we were shown how to fill out the forms.” Samantha admits that the automatic deduction is a plus. “If I had to deposit the money myself – well, with all our expenses, it probably wouldn’t happen.” Russ, her fiancé, concurs. “When I work on jobs at prevailing wage, the extra fringe goes right into my 401(k).”
Millennials, loosely defined as the cohort of people born in the mid 1980’s to late 1990’s, are familiar with debt because of their student loans and easy access to credit cards. But the advantages of long-term investing, portfolio diversification, and compound returns are less well-known and not likely to be taught in college courses. According to a 2016 Bankrate survey, Millennials trail their elders when it comes to investing in the stock market, but older Millennials (ages 26 – 35) are more likely to invest than those who are younger. Income and education levels also make a difference, as 73% of individuals with an income of $75K or more invest in the market compared to only 9% of people who earn under $30K per year.
However, education and income levels are not the only factors that influence retirement savings. Automatic deductions from one’s paycheck are key. “I’ve had a couple of jobs since I graduated from college,” says Todd, a 31-year old graphic designer. “Those were contract positions, so I get a 1099 and don’t have an employer 401(k) plan. I’ve already set up an IRA but my contributions really vary from year to year. I have to pay my bills first, then I contribute to my retirement fund. Usually at tax time, so I can get the deduction.” With a family to support and a wife who works part-time, Todd acknowledges that retirement comes dead last on the priority list when it comes to allocating expenses. “I’m more worried about how we can afford college for our kids. I’ve set up 529 plans for my two children, but even contributing to those accounts are a stretch sometimes.”
Besides automatic deductions from paychecks, education on the true costs of retirement (and how fast it comes!) may help Millennials think about the future.
“I want to plan for retirement,” says Hillary, who owns a business at age 28. “But I have to pay rent and a ton of other expenses related to my business. I owe $8K in credit card debt and I have to pay that off first.”
So how are Millennials doing when it comes to retirement savings? According to NerdWallet: a 2017 Fidelity Investments analysis of 59,000 millennials who have contributed to a 401(k) plan for 10 years showed that the average balance was $109,400 at the end of June 2017. Not too shabby. And the main takeaway is that automatic deductions are a critical piece of retirement savings overall.
This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.
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